Inasmuch as this memorandum assumes statements on my part which I had not made, I have drawn attention to certain such statements in the text. The various criticisms and objections raised by Mr. Lilienthal in this memorandum have largely been refuted by subsequent events. He stated that the acquisition of a large property was too complicated a problem to be undertaken by a new organization. The weight of this objection depends, of course, on the business capacity of the men handling the issue and their willingness to seek competent advice and not to do the whole job themselves. In the course of American business such issues are handled frequently and without long delay. Difficulties which seem insuperable to an inexperienced person who does not have adequate counsel are successfully met in the everyday work of qualified persons. The statement that I would "bail out" the utilities is a wholly incorrect inference from my proposal. The objection that the Authority has "not even a fraction of the necessary funds" for such a transaction was beside the point. The transaction probably could have been financed by first mortgage income bonds, with but limited financial participation by the Tennessee Valley Authority, just as actually has been the case with the Knoxville and Memphis purchases. A power district could have been organized for that purpose. Mr. Lilienthal's assertion that "the chairman's latest proposal means that hundreds of communities involved would have to proceed to acquire their own local distribution systems" is explicity inaccurate. In dealing with the Commonwealth and Southern Corporation for the purchase of the Tennessee Electric Power Co., Mr. Lilienthal himself has recognized the lack of realism in this objection to my proposal. Mr. Lilienthal's assertion that I had proposed "that the transfer to public power be for a limited period, say 5 or 10 years'" is an explicit misstatement. It is not necessary to discuss this memorandum point by point. In many respects his own actions have demonstrated that his criticisms were not well taken. The underlying point of conflict was as to his position that there should be no effort at cooperation with the private utilities. If the purchase which I proposed, and the division of territory, with agreement to limit the Tennessee Valley Authority area of operation for a limited period of years, had been carried out at that time, and there is reason to believe that it could have been carried out, the entire power program of the Tennessee Valley Authority might be years further advanced than it is, and our great losses might have been prevented. On August 15, 1933, Mr. Lilienthal was in the Tennessee Valley Authority office in Washington for a short time and again I urged a meeting between the Tennessee Valley Authority Board and the President. Mr. Lilienthal said he would agree to such a meeting if Dr. H. A. Morgan would do so; that he was going to Knoxville that night, and would wire me the following day. About noon on August 16 I received the following telegram, dated at Knoxville: "Regarding proposed conference with President we will await definite word from you. "DAVID E. LILIENTHAL." I arranged for the meeting, and replied the same day as follows: "ARTHUR E. MORGAN." On that same evening I received the following telegram from Dr. H. A. Morgan: Dr. ARTHUR E. MORGAN, KNOXVILLE, TENN., August 16, 1933,-7:31 p. m. Chairman, Tennessee Valley Authority, Interior Building, Washington, D. C.: Lilienthal and I insist that you advise the President that the conference you have arranged is in the nature of an appeal from the decision of the Board on two previous occasions with reference to your theory that the Valley Authority seek to enter into contracts for division of territory with private utilities. Lilienthal, as directed by the Board. has prepared a project based upon the development of the power program independently of blanket agreements with power companies. It is inconsistent for us to confer with the President on this matter when Lilienthal has not yet submitted his plan, prepared pursuant to specific direction by the Board. The President's energies should be conserved and if you do not advise by wire that you are informing the President of the status of this matter it will be necessary to place a copy of this telegram in the hands of his secretary to that effect. H. A. MORGAN. On receipt of this telegram I saw the President personally and discussed the situation. He then, I believe, saw Mr. Lilienthal, and then saw us together. At that conference he indicated his desire that the Tennessee Valley Authority enter into negotiations with the power companies and endeavor to reach a working understanding with them. At a Tennessee Valley Authority Board meeting in Washington almost immediately afterward Mr. Lilienthal stated that he was opposed to such negotiations with the utilities, but that at the President's request he would undertake them. Thereafter began the negotiations between Mr. Lilienthal and the private utilities which eventuated in a contract of January 4, 1934, with options for the purchase of certain Commonwealth and Southern properties in Mississippi, Tennessee, and Alabama. This contract also provided that for a limited period the Tennessee Valley Authority would restrict its sales of power to this limited territory. To indicate the attitude of the Commonwealth and Southern Corporation, the Tennessee Valley Authority Board minutes of November 2, 1933, contained the following item: "David E. Lilienthal reported that during a recent conference, representatives of the Commonwealth and Southern Corporation stated that after general problems had been worked out the utility would enter into an arrangement without reservations, for the transfer of power facilities from private to public ownership in communities selected by the parties, and that it would be willing to issue a statement to the public concerning the policy adopted if requested to do so by the Authority." About a year and a half later, when the Tennessee Valley Authority and the Commonwealth and Southern Corporation were not on good terms, Mr. Lilienthal deleted this item from the minutes. I have made no charge and now make no charge as to the propriety of this action in deleting this entry from the minutes. The item was and is referred to for the purpose of indicating the attitude of the Commonwealth and Southern during these negotiations. The contract with the Commonwealth and Southern Corporation, which was signed on January 4, 1934, contained the following provision: * During said period ('until midnight, December 31, 1938, or until 3 months after the completion of Norris Dam power plant, whichever is earlier') Authority will not sell electric energy outside of said counties to any municipality, corporation, partnership, association, or individual which, or the distribution system serving which, is now supplied by power companies, nor will Authority sell electric energy outside of said counties to the customers of nonutilities supplied by power companies; provided, however, that nothing herein contained shall be construed to prevent Authority from selling electric energy outside of said counties to any municipality or municipalities which, or the distribution system serving which is not on Je date of the execution of this agreement being served by power companies; and provided further, that distribution systems having interchange contracts with power companies, or supplied by companies or systems having interchange contracts with power companies, shall not within the meaning of this contract be considered as being supplied with electricity by power companies, except that Authority shall not have the right to interchange power with any utility operating under an interchange contract with power companies; and provided further, that nothing herein contained shall be construed to prevent Authority from selling electric energy to rural consumers or organizations thereof, in the counties of Rhea, Roane, Meigs, and the western part of McMinn on the so-called plateau, in the State of Tennessee, not now being served by Tennessee Co., and to rural consumers or organizations thereof in Monroe County in the State of Mississippi not now being served by Mississippi Co.; and provided further, that Authority may serve electric energy to any fertilizer plant or other industry operated by it without any restriction as to the location thereof; and, provided further, that in addition to the above described exceptions nothing in this contract shall be construed to prevent Authority from selling, outside of the five counties or parts thereof above named and the counties named in sections 1, 2, and 3 of this contract, electric energy up to a total demand of 2,500 kilowatts to customers not at the time served by power companies." On February 8, 1934, about a month after this contract was executed, Mr. V. D. L. Robinson, who was Mr. Lilienthal's principal administrative assistant, wrote the following letter: Hon. JOHN H. BANKHEAD, TENNESSEE VALLEY AUTHORITY, Knoxville, Tenn., February 8, 1934. Senate Office Building, Washington, D. C. MY DEAR SENATOR BANKHEAD: Your letter of January 30 addressed to the Board of Directors of the Tennessee Valley Authority has been referred to this office for attention and reply. Application for power by the cities of Oneonta, Hartselle, Tarrant City, Bessemer, Russellville, Guntersville, and Cullman, Ala., have been under consideration for some time and we are all very anxious to do everything possible to serve those cities. As you will recall, a contract was made by the Tennessee Valley Authority with the Commonwealth and Southern Corporation and its subsidiaries, the Georgia, Alabama, Mississippi, and Tennessee Electric Power Cos., whereby we take over certain sections in your State, Mississippi, and Tennessee, including certain transmission facilities and, in the case of Mississippi, several local distribution systems. This contract was made with the view of providing a market for the electric energy produced at Wilson Dam, pending the completion of Norris Dam, when our present contract with the Commonwealth and Southern terminates. At the present rate of progress on the construction of Norris Dam, it is quite possible that the dam will be completed within 2 years. From present indications it appears that we will have the desired market for Wilson Dam power in that part of your State in close proximity to Muscle Shoals and in northeast Mississippi and adjacent to the transmission line between Norris and Wilson Dams in Tennessee. We did not include Bessemer and other points in the immediate Birmingham territory in the present contract, realizing that we would be in better position to serve communities if this service is desired after Norris Dam is complete. We will be in position to serve some of these places you have mentioned, particularly Hartselle and Russellville, at the present time, as Hartselle and Russellville are in the territory itself acquired from the Alabama Power Co., there is nothing in the contract with the Commonwealth and Southern which would preclude full consideration of serving many other cities in Alabama after Norris Dam is in production, or in serving any of those points now, providing a transmission line is constructed by the municipalities to connect with our present lines, or any of those which we will take over from the Alabama Power Co. In order that you may have a copy of our contract with the Commonwealth and Southern immediately available for reference purposes, I am enclosing another copy herewith. If there is any additional information you or any of your constituents desire, we will endeavor to give you such information promptly. In the meantime, Mr. Llewellyn Evans, our chief electrical engineer, and his staff are continuing their study of each situation of Alabama municipalities which have made application for Tennessee Valley Authority power, to ascertain just how, if possible, we may be able to serve them even prior to the completion of Norris Dam. Yours very truly, TENNESSEE VALLEY AUTHORITY, Administrative Assistant. This letter came into the hands of the power companies and raised a doubt as to the good faith of the Tennessee Valley Authority in keeping its agreement. The contract between the Tennessee Valley Authority and the Commonwealth and Southern Corporation of January 4, 1934, provided that the Tennessee Valley Authority would have options to purchase three parts of the Commonwealth and Southern system. One of these parts was in northeastern Mississippi, a second was in northern Alabama, and a third was in eastern Tennessee, north of Knoxville. The Mississippi option was exercised very soon, and the Tennessee Valley Authority purchased those properties and began their operation. As to the other two properties, Mr. Lilienthal declined to purchase or postponed purchasing them under the option. I advised closing the purchase promptly. The way was clear. There were no obstructions to the purchase, yet Mr. Lilienthal postponed action. He had expressed his suspicions of the motives of the utilities. If he wanted the properties and held such suspicions, then good business judgment would have led him to act while there were no obstructions. Yet he delayed for about 6 months, and decision to exercise the option was not reached until June 3, 1934. Then on October 8, 1934, 9 months after the options were secured, a stockholders' suit, commonly referred to as the Ashwander case, was brought to prevent the sale of these properties to the Tennessee Valley Authority. I am informed that shortly before this suit was instituted Mr. Willkie communicated with Mr. Lilienthal and told him that if the Tennessee Valley Authority wished to acquire the properties it would be the part of wisdom to move without delay. Since that time it has been charged that the bringing of the Ashwander suit was evidence of bad faith on the part of the power companies. Be that as it may, in view of suspicions about the motives of the private companies, a delay of 6 months in deciding to consummate the purchase of the Alabama properties, when the Tennessee Valley Authority held an option for that purchase, allowed litigation to develop and was just such a course as tended to conflict, rather than acquisition by agreement. When the Ashwander suit finally was decided in favor of the Tennessee Valley Authority, the option for the north Alabama properties was exercised by the Tennessee Valley Authority. The option for the east Tennessee properties was not exercised, even after all legal restraint was removed, and in that area the method of penetration, conflict, and duplication has continued up to the present. The cost to the Tennessee Valley Authority of this program of conflict in this area, instead of peaceful purchase, never has been appraised. In my opinion it is very high. During 1935 (without consulting Tennessee Valley Authority files I cannot give the exact date) a meeting was held between Mr. Willkie of the Commonwealth and Southern Corporation and the Tennessee Valley Authority board. Mr. Willkie asked whether the Tennessee Valley Authority would consider the purchase of the Tennessee Electric Power Co. Mr. Lilienthal flatly and unequivocally said that the Tennessee Valley Authority was not interested, and made no alternative suggestion of any kind toward any kind of peaceful settlement. This action left no way open to the Commonwealth and Southern Corporation except to acquiesce in disruption of its system, or to protest in the courts. Mr. Lilienthal's course seemed to invite litigation. Thereafter Mr. Lilienthal continued his policy of penetration and disruption, while continuing to charge the utilities with obstructive litigation. In May 1936 Mr. Willkie, of the Commonwealth and Southern Corporation, again urged Mr. Lilienthal that some basis be found for the peaceful purchase of some parts or all of the Commonwealth and Southern properties by the Tennessee Valley Authority, and that an end be made of the policy of disruption and =duplication of facilities. In refusing Mr. Willkie's request Mr. Lilienthal stated terms and policies to Mr. Willkie which never had been approved by the Tennessee Valley Authority Board, and then he withheld any report to the Board on that conference until the power companies had considered his position and had decided on the so-called Eighteen Power Companies suit. In accordance with the division of powers between the directors determined upon by Mr. Lilienthal and Dr. H. A. Morgan about August 1, 1933, Mr. Lilienthal was made sole negotiator with the utilities, and I, as chairman of the Board, had no knowledge of those negotiations except through his reports. Early in 1937 very important negotiations were under way between Mr. Lilienthal and Mr. Willkie. I took the position that before those were concluded the Tennessee Valley Authority Board as a whole should meet with Mr. Willkie, and should learn at first hand of his position. At the resulting meeting held on February 2, 1937, Mr. Willkie stated that Mr. Lilienthal's statement of January 29, 1937, of the position of the Commonwealth and Southern Corporation was inaccurate. Mr. Willkie's attitude was that of an extreme desire to reach a settlement by peaceful and orderly methods. Mr. Lilienthal's attitude was in line with his policy of piecemeal penetration and disruption. The publicity concerning this meeting given out by Mr. Lilienthal and Dr. H. A. Morgan was explicitly false and misleading to the public. I have made a full statement of that occasion in a memorandum to the congressional investigating committee. From 1933 to 1937 Mr. Willkie, president of the Commonwealth and Southern Corporation, urged that the Tennessee Valley Authority work out a method of settlement by the purchase from it by the Tennessee Valley Authority of fairly delimited areas at a fairly determined price. Except for the contract of January 4, 1934, entered into at the insistence of the President and against the wishes of Mr. Lilienthal, the Tennessee Valley Authority during that period refused to adopt that course, but chose penetration, disruption, and conflict. The greatest financial loss claimed by Mr. Fly on the part of the Tennessee Valley Authority and the public due to litigation is in the case of Knoxville, which involved relations with a subsidiary of the Electric Bond & Share Co. The original negotiations were carried on under a threat to duplicate facilities. According to statements made to the Tennessee Valley Authority Board by Mr. Lilienthal and his associates during the progress of these negotiations, the price decided upon under this threat was not the actual value of the property, but was one or two million dollars less than that actual value. A stockholders' suit was brought to prevent the carrying out of the contract, on the ground, among other things, that the price was inadequate. After protracted litigation and further negotiations a new contract was made and the property was purchased by the city of Knoxville. Under the new contract, besides compensation to cover the additional value of improvements or additions, the price finally paid was about a million dollars greater for the same property than the first offer which resulted in a stockholders' suit. The loss due to delay in acquiring the Knoxville properties, according to testimony given by Mr. Fly before the investigating committee, was in excess of $6,000,000. It may have seemed a clever accomplishment, under threat of duplicating facilities, to get a contract for these properties at much less than their value. However, it now seems quite clear that a program of fair dealing, without taking advantage of the power of arbitrary coercion to get property for less than its real value, would have been better policy. The program of relying on arbitrary coercion, and of preferring a spectacular public battle to peaceful and impartial negotiations, has accomplished certain results. It has helped to make the public of that region "power conscious” and doubtless has contributed to the increased use of electric power in the Tennessee Valley Authority area. It has been an effective but expensive form of advertising or load building not charged against the Tennessee Valley Authority "yardstick" program. And finally, the whole Tennessee Valley Authority power program has been delayed, confused, interfered with, and obstructed. The standing of the Government as to openness and fairness has been undermined. If substantially the policy which I proposed in July and August of 1933 had been adopted, the Tennessee Valley Authority might have saved millions of dollars, and its program might be much further advanced. In conclusion I wish to repeat the statement I made in my memorandum of August 14, 1933, concerning what I considered would be the inevitable result of the policy of preferring penetration, disruption, and conflict, rather than negotiation and agreement. "If the Tennessee Valley Authority must establish itself by paralleling the lines of private companies serving some municipalities along a transmission line, and missing others, then there will be great duplication of plant and personnel, and great waste. The cost of generation and transmission for the Tennessee Valley Authority may be higher than in a territory served by a single system, and the comparison of public and private ownership will be unfair to public ownership. * * If the Tennessee Valley Authority area must experience the warfare of the duplication of facilities and personnel, with the hard feeling and bitterness and other unfavorable developments that would accompany such warfare, then the Tennessee Valley Authority for a considerable period will be less ef fective, and will be less representative of what economic planning can ac complish. * * "The present course, of discussing the sale of power with all inquirers, but with no suggestion of policy to the private utilities, is equal to a declaration of war, and tends to result in attitudes which will lead to competition through duplication of facilities over a wide area. The present course if persisted in will surely result in an attitude of strife and antagonism." "In conclusion, I believe that postponement of the formulation of a policy with reference to power, and a continuance of present methods of approaching municipalities who consider purchasing power from the Authority, is in effect the establishment of a policy, one that is contrary to that which the administration has in mind in promoting the Tennessee Valley Authority bill in Congress, and one that may be contrary to the interests of the Tennessee Valley Authority." Time has justified this appraisal of the situation. Substantially the proposal I made in July and August of 1933 remains today, in its broad outlines, a sound policy. |